EUR 23.87 For Business Accounts Only

ABUK EY | Maintaining our Overweight call

Value proposition holds. The government issued a new feedstock formula on 13 September that moves Abu Qir away from a fixed gas price of USD5.75/mmBtu to one that is linked to end-product prices. The decision raises the producer’s gas prices in the short term (by 30% in FY23e and 13% in FY24e), but reduces it beyond FY24e, based on our urea price outlook. With EGP weakness and a higher cost of capital assumption, the net effect is a 9.5% cut in our 12M TP to EGP38.0/share. Abu Qir trades on an EV/EBITDA of less than 1.5x, even after export urea prices normalise.

Urea has good support heading into 2023. Despite more exports out of Russia than what initially seemed possible, urea prices gained 18% to USD850/t from Jun-22 lows, mostly as a result of further scaling down in the EU where 50% of ammonia capacity is now offline vs. 25% as of Mar-22. This should support urea prices near spot levels as we head into the winter, later falling to USD550/t in FY24e, on global supply-side responses. We believe what appears to be permanent changes to European energy markets, decarbonisation, and industry ageing will create a higher long-term floor of USD450/t (Egypt hub) vs. a historical average of ~USD300/t.

New feedstock formula simplifies the variables. The new formula allows the government to share windfall profits during bull commodity cycles, without compromising the industry’s export advantage, in our view, providing visibility that the current set-up will last. We see a higher local urea price as inevitable. It would, however, simultaneously raise the feedstock cost, proving less value-accretive than before. A USD50/t hike in the local urea price would add 8% to our 12M TP.

EGP weakness would push FY23e net cash to 65% of market cap. Abu Qir remains a strong beneficiary of currency weakness. Export proceeds form 78% (vs. gas costs which are under 40%) of FY23-27e revenue. Further EGP weakness explains 15% of our 12M valuation. With recent shareholder and board changes, alongside the need to preserve cash for planned investments, the proposed FY22 DPS was reduced to a DPO of 42% vs. a historical average of 74%. Even at a 35% DPO, Abu Qir offers an attractive 10.6% dividend yield for FY23e.